Force-Placed Insurers on Hot Seat as N.Y. Regulators Expand Probe

New York regulators are expanding their investigation into the so-called force-placed insurance that target homeowners in financial distress.

Benjamin Lawsky, the state’s superintendent for the financial services department, said Thursday that he has asked largest licensed force-placed insurers operating in New York to provide a detailed accounting of their expenses, claims payments and profits. Regulators say initial findings from their investigation have raised more concerns.

Regulators Seek More Documents From Insurers

Lawsky said his department has sent formal document requests to several insurers. These companies include: Balboa Insurance Company; QBE Insurance Corporation; QBE Financial Institution Risk Services Inc.; American Security Insurance Company (Assurant); American Bankers Insurance Company of Florida (Assurant); Meritplan Insurance Company; American Modern Home Insurance Company; Empire Fire and Marine Insurance Company; and Fidelity and Deposit Company of Maryland.

These insurers will now have to provide to regulators extensive information and supporting documentation, including:
• An actuarial or statistical justification for force-placed insurance rates currently on file with the department;
• A detailed explanation of how rates and expected loss ratios are calculated;
• A detailed explanation and itemized report of insurers’ expenses relating to force-placed insurance; and
• A detailed explanation and itemized report of the payments insurers receive relating to force-placed insurance.

Public Hearings to Be Scheduled for May

Additionally, Lawsky said his department will hold public hearings in May to review whether rates for force-placed insurance are excessive. The hearings will also examine the relationships between — and payments to and from — insurers, banks, mortgage servicers and insurance agents and brokers.

The superintendent also said testimony will be taken from homeowners affected by force-placed insurance and from the banks, insurers, reinsurers and brokers who operate in the force-placed market. Information gained from the hearings will guide the department’s future action in this area.

“It appears that force-placed insurers charge very high premiums, but pay out only a very small percentage of those premiums on claims—as little as 20 cents on the dollar. In addition, questionable payments are made to various players in the force-placed business, further increasing the profits to insurers and banks,” Lawsky said. “We have asked insurers to provide a complete breakdown of how much they collect and where every penny goes so we can determine if the premiums are appropriate and the basis for these payments.”

‘Extremely Low’ Loss Ratio

Lawsky and his department have been conducting a broad industry-wide investigation of force-placed insurance in recent months. According to regulators, the investigation revealed that, for force-placed insurance, the percentage of premiums paid on claims, known as the loss ratio, is “extremely low” — in most cases, dramatically lower than the expected loss ratios insurers filed with the department.

For example, based on the investigation, while most insurers filed a loss ratio of 55 percent, one major insurer’s actual loss ratios for the last six years averaged 22 percent and another averaged less than 20 percent, according to the department. This raises serious concerns about whether premiums for this insurance have been artificially inflated, regulators said.

Relationships Between Insurers, Banks

Regulators said their investigation so far suggests that high rates for force-placed insurance appear to be at least partly caused by relationships between and payments by insurers to banks and their affiliates — including mortgage servicers and insurance agents and brokers.

Insurers pay high commissions to the banks or their affiliates presumably to guarantee the insurers will receive business, regulators said. Early findings suggest that 15 percent or more of premiums collected by force-placed insurers flow to the banks through insurance agents affiliated with the banks.

Regulators allege that these insurers may also give banks a share of the profits by giving some of the insurance premium to a reinsurer owned by the bank. Since the claims payments are so low, the banks could be gaining a substantial portion of the profit without actually taking on a great deal of risk.

Conflicts of Interest?

The investigation so far also shows that the banks now have a significant conflict of interest, regulators argued. Often, it is the banks’ servicers who are supposed to file insurance claims, but have a strong reason not to do so. When the mortgage is owned by investors, filing a claim will benefit the investors, but reduce the profits of the servicers’ owners, the banks.

Force-placed insurance is taken out by a bank or mortgage servicer when a borrower does not maintain the homeowners’ insurance required by the mortgage documents, regulators said. This can occur if the homeowner misses a mortgage payment, the homeowner allows the homeowners’ policy to lapse, or if the bank or mortgage servicer determines that the borrower does not have a sufficient amount of coverage.

Force-placed insurance is typically far more expensive than the coverage purchased by a homeowner — anywhere from two to ten times more costly — yet often provides less protection for the homeowner while protecting the lender’s or investor’s interest in the property, according to regulators.

“There appear to be a number of very significant problems with force-placed homeowners’ insurance. The price is often extremely high — as much as ten times the normal rate for homeowners’ insurance,” Lawsky said. “And sometimes consumers have this high priced policy forced on them when their own insurance is still in place. At the hearings, we will explore whether banks are using force-placed insurance to increase their profits at the expense of homeowners and investors.”

Lawsky said the high cost of force-placed insurance adds to struggling homeowners’ debt burden and makes it even more difficult for them to avoid foreclosure.